Are Zombie Banks Real Liquidity Providers

A zombie bank is a stark and foreboding feature of the modern economy. The term zombie bank is essentially used to refer to a financial institution that possesses an economic net worth that is less than zero, which essentially means that this financial institution is in debt. Technically speaking, a financial institution that does not have any more money, that is, in fact, in debt itself should cease to be called a financial institution, as it does not possess any money that it can provide to other people, nor can it be trusted with anyone’s money as this money could very well be used to pay off debts.

However, the thing about zombie banks is that, even though they are in debt, they are continued to be called financial institutions. They are able to continue functioning in this capacity because their debts are being paid off through credit provided by the government. Whether this credit is being intentionally provided for this purpose varies, but the result is the same: a financial institution that is being its debt off by collecting more debt from a slightly less strict debt collector in order to continue providing financial services to unknowing patrons.

Liquidity is a term used to describe a markets ability to sell an asset quickly without having to reduce its price. This usually occurs due to the fact that the asset in question is in particularly high demand, and will be sold off quickly regardless of the markets requirements. Gold, for example, is an asset that is virtually always in high demand. Hence, the gold market has a high market liquidity. One asset with the absolute highest market liquidity is cash. Cash can be used immediately to purchase virtually anything and the speed with which it is used has no affect on its value. One does not need to wait for someone that is willing accept cash, because cash is the basic medium of financial transactions throughout the world.

The liquidation of an asset is essentially the exchanging of an asset with low market liquidity for an asset with high market liquidity. The asset with high market liquidity is often provided in a larger amount, proportional to the availability of that asset, than the asset with lower market liquidity. The most common form of liquidation is the exchange of any asset for cash, an act which is referred to as selling.

Zombie banks provide liquidity, it can be argued. If gold is provided to a zombie bank, cash is provided in exchange. However, this cash, this asset that is being provided by this zombie bank, is not an asset that the zombie bank possessed in the first place. Hence, the asset provided will likely be government money intended for an entirely different purpose. As a result, zombie banks certainly do not provided any real form of liquidity for assets due to the fact that they don’t possess the most liquid asset of all: money.